Proposed Bankruptcy Rule and Official Form Amendments Approvedd

The Committee on Rules of Practice and Procedure recently approved the recommendations of the Advisory Committee on Bankruptcy and approved the following proposed amendments and new rules: Bankruptcy Rules 1005, 1006, 1007, 1009, 1010, 1011, 1015, 1017, 1019, 1020, 2002, 2003, 2007.1, 2015, 3002, 3003, 3016, 3017.1, 3019, 4002, 4003, 4004, 4006, 4007, 4008, 5001, 5003, 6004, 7012, 7022, 7023.1, 8001, 8003, 9006, 9009, and 9024, and new Bankruptcy Rules 1021, 2007.2, 2015.1, 2015.2, 2015.3, 5008, and 6011. In addition, revisions to Official Forms 1, 3A, 3B, 4, 5, 6, 7, 9, 10, 16A, 18, 19, 21, 22A, 22B, 22C, 23, 24, and Exhibit D to Official Form 1, and new Official Forms 25A, 25B, 25C, and 26 have been approved. The Committee will transmit the proposed new rules and amendments to the Judicial Conference with a recommendation that they be approved and transmitted to the Supreme Court. The revised official forms are available at http://www.uscourts.gov/bankform/index.html.

The Committee also approved the recommendations of the Advisory Committee on Bankruptcy Rules and approved publishing for public comment the following proposed rules and forms amendments and new rules, which include a number of amendments on the computation of time under the rules: Bankruptcy Rules 1007, 1011, 1019, 1020, 2002, 2003, 2006, 2007, 2007.2, 2008, 2015, 2015.1, 2015.2, 2015.3, 2016, 3001, 3015, 3017, 3019, 3020, 4001, 4002, 4004, 4008, 6003, 6004, 6006, 6007, 7004, 7012, 7052, 8001, 8002, 8003, 8006, 8009, 8015, 8017, 9006, 9021, 9027, and 9033, and proposed new Bankruptcy Rules 1017.1 and 7058. In addition, revisions to Official Forms 8 and 27 were approved. The proposed amendments, which are expected to be published in August 2007 will be available at http://www.uscourts.gov/rules/newrules1.htm.

USTP Issues Statement on Disposable Income Test

The United States Trustee Program (USTP) has issued a nine page, line-by-line summary of Official Form B22C, which is used to calculate the debtor's disposable income under Bankruptcy Code Sec. 1325(b). The summary gives the USTP’s position on various legal issues arising under the “means test.” No citations to legal arguments are provided.

Many of the issues listed are identical to the issues arising under the Chapter 7 means test of Sec. 707(b). However, several of the issues are unique to the Chapter 13 disposable income test. The positions provided in the summary reflect an attempt to harmonize the Chapter 7 means test with the Chapter 13 disposable income test for debtors with income above the state's median income.

A copy of the USTP's position statement may be accessed at the website of the USTP at http://www.usdoj.gov/ust/eo/bapcpa/docs/Disposable_Income_Ch13_UST_Policies.pdf..

Supreme Court Docket

Petitioner Entitled to Contractual Attorneys’ Fees in Bankruptcy

In a unanimous decision written by Justice Alito, the United States Supreme Court on March 20, 2007, ruled that an unsecured creditor may recover contractual attorneys’ fees incurred while litigating issues of bankruptcy law.

Underlying the dispute was a prepetition surety bond issued by the petitioner guaranteeing the debtor’s payment of state workers’ compensation benefits. During the debtor’s bankruptcy proceedings, the petitioner and the debtor disagreed about the petitioner’s rights under the debtor’s reorganization plan. Litigation ensued, but that ultimately was settled.

The petitioner sought to recover attorneys' fees according to its indemnification agreements with the debtor. The parties agreed that the petitioner could recover attorney fees in protecting its indemnity agreements but not while litigating issues under bankruptcy law. The bankruptcy court denied the petitioner’s application for attorneys’ fees, ruling that attorneys’ fees are not recoverable in bankruptcy for litigating issues peculiar to bankruptcy law.

The Fobian Rule

The district court affirmed, relying on the so-called Fobian rule (In re Fobian, 951 F.2d 1149 (9th Cir. 1991)), which dictates that attorneys’ fees are not recoverable in bankruptcy for litigating issues of federal bankruptcy law. The Ninth Circuit affirmed, thus joining three other Circuit Courts that have ruled that a contract that allows for fee recovery does not overcome a general bar on such fees in bankruptcy. Five other Circuit Courts have held that contractual attorneys' fees are recoverable in bankruptcy provided the underlying contract is enforceable under applicable state or nonbankruptcy law.

Allocation of Fees under the Code

A contract allocating attorneys’ fees that is enforceable under nonbankruptcy law is allowable in bankruptcy unless the Bankruptcy Code provides otherwise. The question before the Court, therefore, was whether a specific provision of the Bankruptcy Code disallows contract-based claims for attorneys’ fees based solely on the fact that the fees at issue were incurred litigating issues of bankruptcy law. Vacating the Ninth Circuit’s ruling, the Court found no such provision.

Section 506(b)

The debtor argued that Section 506(b) authorizes the recovery of contractual attorneys’ fees to the extent the petitioner is oversecured and, therefore, by implication disallows such claims to the extent the petitioner is either not oversecured or, like the petitioner, completely unsecured. But the Supreme Court refused to consider whether Section 506 provides an independent basis to deny unsecured petitioners the recovery of attorneys’ fees in bankruptcy since the debtor did not raise the argument before the lower court.

Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co. (05-1429)

Scope of ERISA in Bankruptcy

The U.S. Supreme Court granted certiorari in Beck v. PACE International Union, Docket No. 05-1448, to determine whether a pension plan sponsor's decision to terminate a plan by purchasing an annuity, rather than to merge the pension plan with another, is a plan sponsor decision not subject to ERISA's fiduciary obligations.

A California bankruptcy court determined that the debtor's board breached its fiduciary duties to plan participants and beneficiaries under the Employee Retirement Income Security Act of 1974. The bankruptcy court issued a preliminary injunction ordering that the debtor maintain the residual assets of the plan in an interest-bearing account pending a final decision on the allocation of the assets. The bankruptcy court exercised its broad equitable power and approved a distribution of plan assets as set forth by the parties. On appeal, the U.S. Court of Appeals for the Ninth Circuit determined in an unpublished opinion that the bankruptcy court did not abuse its discretion in awarding the relief.

Around the Circuits
Recent Bankruptcy Decisions

1st Circuit

Anti-Modification Provision Inapplicable to Lot Encroaching Residence

The Bankruptcy Code’s protection of mortgage lenders against modification of claims secured by a principal residence did not apply where a debtor’s residence only encroached on his mortgaged property by a small amount.

The debtor resided in a house that straddled the property line between two lots. The majority of the house sat on one lot, but the house's street address was that of the other lot. When the debtor filed his Chapter 13 petition, he claimed both lots as assets.

The mortgagee filed a proof of claim for the full value of the mortgage on the property, and the debtor objected and moved for determination of secured status. Also, as part of his proposed Chapter 13 plan, the debtor sought to bifurcate the mortgagee's claim, and the mortgagee objected. The bankruptcy court allowed bifurcation of the claim, and the district court affirmed.

On appeal, the U.S. Court of Appeals for the First Circuit held that, if the mortgagee's claim was secured by the debtor's principal residence, then the claim could not be modified by bifurcating it into secured and unsecured claims, even though the value of the land is roughly one-tenth of the value of the claim. However, in this case the encroachment was minimal—the eight to 10 foot encroachment of the house onto the mortgaged property was not the principal part, or even an important part, of the residence.

In re LaFata, 2007 U.S. App. LEXIS 7610 (1st Cir. 2007)

Postpetition Increase in Income Not Subject to Means Test

A New Hampshire bankruptcy court recently held that consideration of postpetition developments in the application of the means test under Bankruptcy Code Sec. 707(b)(2) would be contrary to Congressional intent. Consequently, the court refused to dismiss the debtors’ Chapter 7 bankruptcy case even if a postpetition increase in the debtors’ income created a presumption of abuse.

The means test was intended by Congress to be applied to the debtors' financial circumstances on the petition date. To the extent that the trustee or the court wished to consider postpetition changes in those circumstances, the totality of the circumstances test of Sec. 707(b)(3) had to be applied. The court then accurately summarized the interplay between sections 707(b)(2) and 707(b)(3): the former creates a mechanical formula for presuming abuse whereas the later section of the Code bestows upon the bankruptcy courts the ability to consider circumstances, including postpetition developments, in determining abuse.

At the time of the meeting of creditors, the Chapter 7 debtors decided that they could no longer keep their home that was currently in foreclosure and had moved out of the home. Nonetheless, the bankruptcy court determined that the debtors could "deduct the amounts scheduled as contractually due" regardless of their intent with respect to retention of the collateral, reaffirmation, or actual payment of the secured debt. Section 707(b)(2) does not refer to the debtors' statement of intention and requires the debtors, the trustee, and the court to consider only the amounts due under the contracts themselves.

In re Hartwick, 2007 Bankr. LEXIS 476 (Bankr. D. NH. 2007)

Petition Date Determines Lien Avoidance

In In re Wilding, 475 F.3d 428 (1^st Cir. 2007), the First Circuit U.S. Court of Appeals ruled that a debtor may avoid a judicial lien even if the lien is satisfied prior to filing a motion to avoid, so long as the lien in question impaired an exemption as of the bankruptcy petition date. The debtor received a discharge without seeking to avoid a judicial lien on his homestead. Sometime later when the debtor sought to refinance his home he asked the bankruptcy court to reopen his case so he could avoid the lien; however, the debtor satisfied the lien before the court could rule on the motion. Nonetheless, the court reopened the case and denied the motion because the lien no longer impaired the debtor’s homestead exemption. The 1^st Circuit reversed, finding that it did not matter whether the lien still impaired the debtor’s homestead exemption, only that the lien impaired the homestead when the debtor filed for bankruptcy.

Repeat Filing Does Not Terminate Stay

Noting a split of authority and following what it characterized as the majority view, the Bankruptcy Appellate Panel for the First Circuit that Section 362, which terminates the automatic stay on the 30th day after the filing of a debtor's second bankruptcy petition terminates the stay only with regard to the debtor and the debtor's property, not with regard to estate property. In so ruling, the BAP held Congress to its words in applying the newly-created 30-day stay to repeat filers.

Congress amended Section 362 to provide that when a debtor has been in a prior case dismissed within a year of the present filing, the stay terminates "with respect to the debtor" on the 30th day after the filing date. "Property of the debtor" is generally something different that "property of the estate," and, Section 362 seems to make distinctions between property of the debtor and property of the estate and the effect of the stay as to each.

The BAP observed that a complete termination of the stay would make sense, but that is not what the statute provides. Congress used different language in Section 362(c)(4)(A) in describing what happens to multiple repeat filers (debtors who have more than one prior case dismissed in year prior to the current case), where it says that "the stay under subsection (a) shall not go into effect." Section 362(c)(3)(A) unambiguously terminates the stay only as it protects the debtor. While this is a lesser penalty than complete termination, the panel found that a literal reading of the statute is consistent with Congressional intent to discourage abusive filings. Jumpp v. Chase Home Finance, L.L.C., 2006 Bankr. LEXIS 3504 (Bankr. 1st Cir. 2006)

2nd Circuit

Deduction Allowed for Collateral to be Surrendered Post-Petition

Payments on secured debt are proper deductions under the "means test," even if the debtor proposes to surrender the collateral post-petition. The means test calls for a snapshot of the debtor's obligations on the petition date. The debtor's stated intent to surrender collateral did not change the fact that the relevant secured debt was extant on the petition date. In addition, the debtor's statement of intention was not a self-effectuating document; it was not an actual surrender, only a statement by the debtor of his or her intent to surrender the collateral in the future. In re Longo, 06-30781, (Bankr. D. Conn. 2007)

"Hanging Paragraph" Does Not Protect Negative Equity Debt

The hanging paragraph of Section 1325(a) does not protect claims secured by automobiles that are purchased for personal use within 910 days pre-petition if the loan was for more money than the car was worth. In In re Jackson, 2007 Bankr. LEXIS 43 (Bankr. W.D.N.Y. 2007), the unpaid balance of the debtor's trade in was added to cash price of the new automobile. The debtor's plan treated the lender's claim as secured only to the extent of the new car's retail value, which was less than the loan amount.

The creditor objected to confirmation of the debtor's plan, arguing that the hanging paragraph added to Section 1325(a) entitled it to full payment. However, the protection afforded by the hanging paragraph for 910 vehicles applies only to claims secured by a purchase money security interest. Consequently, the creditor was not entitled to full payment because a portion of the loan was for refinanced debt.

3rd Circuit

Lifestyle Relevant to Good Faith, But Not Determinative

A bankruptcy court may consider a debtor's income, expenses, and lifestyle as part of an assessment of good faith when deciding whether to dismiss the debtor’s bankruptcy under Bankruptcy Code Sec. 707(a). The recent amendments to the abuse provisions of Sec. 707(b) do not impliedly preclude a court from considering such income-and-expense factors. But substantial income and a comfortable lifestyle, was insufficient to demonstrate bad faith in a recent case decided by the Third Circuit Court of Appeals.

A creditor in the debtor’s bankruptcy argued that the debtors’ ability to repay their debts, especially considering their substantial income and lavish lifestyle. A bankruptcy court may consider a debtor's income and expenses, together with other factors in assessing good faith. But the court's ultimate finding of bad faith may not be based exclusively on a debtor's financial means; otherwise, dismissal would essentially be based upon a debtor's mere ability to pay.

The debtors did not scheme to conceal or misrepresent income, file misleading schedules, or engage in any other misconduct. On the contrary, the debtors were straightforward in their schedules and forthcoming with the court and their creditors. Moreover, the debtors did not time their filing to shield a future source of income, and the accrual of their debt to start a medical imaging company, which had a business plan and definite income projections, was not unreasonable. Therefore, the debtors' case was not the type of egregious situation that warranted dismissal for lack of good faith under Sec. 707(a).

In re Perlin, 2007 U.S. App. LEXIS 18461 (3rd Cir. 2007)

Right to Cure Lost Following Foreclosure Sale

Resolving a division between the New Jersey bankruptcy and district courts, the U.S. Court of Appeals for the Third Circuit ruled recently that a Chapter 13 debtor does not have the right to cure a default on a mortgage secured by the debtor's principal residence between the time the residence is sold at a foreclosure sale and the time the deed is delivered.

Since the enactment of Bankruptcy Code Sec. 1322(c)(1), New Jersey bankruptcy and district courts have disagreed over whether the subsection allows a debtor the right to cure a default on a home mortgage between the time when the residence is sold at a foreclosure sale and the time the deed is delivered. However, the phrase "a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law" is not ambiguous; the phrase refers to the sale itself, not to the entire sale process. Moreover, New Jersey bankruptcy courts, foreclosure practitioners, statutes, procedural rules, and the state supreme court all treat the term "foreclosure sale" synonymously with "foreclosure auction." Therefore, a home is sold at a foreclosure auction, and the delivery of the deed is a ministerial act which does not affect the redemption rights of the parties.

The legislative history of Sec. 1322(c)(1) appears to support the court’s ruling. That section was added to the Bankruptcy Code to make explicit that a debtor's right to cure a default on a mortgage secured by his or her principal residence continues at least until the foreclosure sale, and may continue beyond that date if state law provides additional cure rights. In other words, Congress enacted the subsection to establish a uniform time--the foreclosure sale--for expiration of a debtor's federal right to cure. Policy considerations also lend support to the court’s ruling: setting the expiration of a debtor's right to cure at the foreclosure sale, as opposed to the delivery of the deed, ensures that the debtor receives notice of the impending sale and ample opportunity to protect his or her interests by filing a bankruptcy petition prior to the sale and exercising the right to cure.

In re Connors, 2007 U.S. App. LEXIS 18452 (3rd Cir. 2007)

Retroactive Annulment of Stay Proper in Light of Bad Faith

A bankruptcy court did not abuse its discretion by dismissing a debtor's bankruptcy case on grounds of bad faith and refusing to convert it from Chapter 13 to Chapter 7.

The debtor and her husband owned several corporations that sold "wander-control" patient monitoring systems to nursing homes. A creditor obtained a state court judgment against the couple. Three days after the state court judge announced that he would issue his judgment, but the day before he actually did so, the debtor filed her Chapter 13 bankruptcy petition. When the state court judge issued his rulings, it entered nine orders, including the judgment, assessment of sanctions against the debtor, an injunction that effectively froze the assets of the debtor's corporation, and a directive to appear for a contempt hearing for failure to appear in court for the rulings.

The next day, the debtor's husband withdrew funds from the debtor's corporation in violation of the court order. Not only did the debtor know of her husband's actions, but she used the money to pay her attorneys' fees. The creditor sought to dismiss the debtor's bankruptcy as filed in bad faith, and the debtor sought to avoid the state court orders against her as violations of the automatic stay. The bankruptcy court dismissed the debtor’s bankruptcy case.

Abuse of Discretion

The debtor argued that the bankruptcy court abused it discretion by dismissing the debtor's bankruptcy case and refusing to convert it from Chapter 13 to Chapter 7; that actions taken in violation of the automatic stay were void ab initio and must be set aside; and that the bankruptcy court abused its discretion by retroactively annulling the automatic stay. However, the U.S. Court of Appeals for the Third Circuit determined that the bankruptcy court did not abuse its discretion by dismissing and refusing to convert the debtor's bankruptcy case. The court cited a number of factors that supported the lower court’s finding of bad faith, including the fact that the debtor filed for bankruptcy after the state court announced that it would rule against the debtor on the fraudulent conveyance. The same factors that indicated that the debtor filed her Chapter 13 petition in bad faith would apply with equal force to her Chapter 7 filing.

Automatic Stay

Even though the state court violated the automatic stay by entering orders against the debtor, holding her in contempt, and incarcerating her, those violations were retroactively ratified by annulment of the stay. This approach was necessary to preserve the meaning of the term "annulling" in Bankruptcy Code Sec. 362(d). Despite the possibility that the creditor actively encouraged the state court's stay violation, the only effect of its refusing to ratify the state court action would be to reward the debtor for her attempted abuse of the bankruptcy system. A bankruptcy court has wide latitude to balance the equities when granting relief from the automatic stay, in this case concluding that the debtor's dilatory tactics outweighed the creditor's unclean hands in encouraging the state court's stay violation.

In re Myers, 2007 U.S. App. LEXIS 14717 (3rd Cir. 2007)

Debtors Not Entitled to Disposable Income Adjustment for Attorneys, Trustees Fees

Neither the bankruptcy trustee's commission nor Chapter 13 debtors' attorneys' fees could be deducted from the projected disposable income received by the trustee during the applicable commitment period, as provided by the debtors' modified plan. The trustee added onto the debtors’ original “pot plan” the amounts necessary for payments of attorneys’ fees and trustee commission. However, Sec. 1325(b)(1) provides that all of a debtor's disposable income must be paid to unsecured creditors, leaving nothing for payment to other classes of creditors. Claims for attorneys’ fees and the trustee’s commission do not fall within the class of unsecured creditors.

Official Form B22C provides for a deduction of the trustee’s commission from the debtors' available disposable income, thus a further reduction in the amounts to be paid to general unsecured creditors for the trustee's commission would amount to inappropriate double-counting. Form B22C does not make any reference to attorneys' fees and, while the omission may be unfortunate, it is binding on the court.

In re Amato, 2007 Bankr. LEXIS 836 (Bankr. D. NJ. 2007)

Circuit Addresses Effect on Marital Property

In two recent decisions, the Third Circuit Court of Appeals clarified the interplay between state property rights and Bankruptcy Code exemptions. In In re Brannon, Nos. 05-4600 & 05-5060 (3rd Cir. 2007), the court ruled that a spouse's "aggregate interest" in entireties property is not limited to half of the value of the property. While "aggregate interest" is not defined in the Code, bankruptcy does not sever a tenancy by the entireties, but leaves the tenancy's general characteristics in place, including the right of one tenant to act on behalf of both with respect to the whole of the entireties property. Limiting the exemption to 50 percent, as proposed by the trustee, would restrict each spouse's rights to act with respect to the whole property. But the trustee is given no more authority than the authority given to creditors, and creditors may not "sever the unity of the tenancy."

In In re O'Lexa, No. 06-2254 (3rd Cir. 2007), a companion case to Brannon, the court held that a creditor may "sever the unity of the tenancy" only if both spouses are jointly liable on a debt. Thus, the debtor in O'Lexa was entitled to a general exemption in her family residence co-owned with her non-debtor husband as tenants by the entirety, even though the debtor incurred her debts for household expenses, which were necessaries under state law therefore could be collected from the debtor spouse alone or from the separate property of the non-debtor spouse. However, unless a debt is incurred by both spouses, a creditor may not execute on jointly-owned entireties property.

Confirmation Order Final Absent Showing of Fraud

In In re Szalinski, No. 06-22423 JAD (Bankr. W.D. Pa. 2006) a creditor's untimely objection to the treatment of its claim by a confirmed Chapter 13 plan was rejected. Despite having notice of the proposed treatment of its claim, the creditor did not file a timely objection to confirmation. Thus, in order to modify the terms of the debtor's confirmed plan, the court would have to amend or revoke its order of confirmation. However, the only ground for revocation is fraud, which was not present in this case. The court added that absent a showing of fraud or lack of notice, once a plan is confirmed, it may not be challenged on the grounds that it does not comply with a specific subsection of the Code.

4th Circuit

No Tolling During Waiting Period Between Discharges

In Tidewater Finance Co. v. Williams, 2007 U.S. App. LEXIS 19474 (4th Cir. 2007), the Fourth Circuit Court of Appeals held that the mandatory period a debtor must wait to obtain a second Chapter 7 discharge is not tolled during the pendency of any intervening Chapter 13 bankruptcy filed by the debtor.

The debtor filed five bankruptcy petitions during an eight-year period. Her first petition was filed under Chapter 7 and the debtor received a discharge. The debtor later filed two Chapter 13 petitions, both of which were dismissed without discharge. Then, a creditor obtained a judgment against the debtor based on her default on an auto loan. Shortly thereafter, the debtor filed a third Chapter 13 petition, which was dismissed two years later.

The debtor filed her most recent petition prior to the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which extended the waiting period from six to eight years. But even though more than seven years had passed since the debtor filed her first Chapter 7 bankruptcy, a creditor argued that the period set out in Sec. 727(a)(8) was "equitably tolled" during the debtor's three Chapter 13 proceedings. If the statutory period were tolled during the Chapter 13 proceedings for a total duration of more than two years, the debtor would not be able to obtain a second Chapter 7 discharge.

However, Sec. 727(a)(8) does not impose a limitations period or require a creditor to file a claim within a specified time period. Instead, the provision conditions the ability of a debtor to obtain a Chapter 7 discharge by requiring her to wait six (now eight) years after initiating earlier proceedings that ended in discharge.

In fact, the six-year period in Sec. 727(a)(8) does not commence when a creditor has a complete and present cause of action; it commences when the debtor initiates a bankruptcy proceeding, which may be well before the creditor has a complete and present cause of action. If Congress had intended to guarantee creditors six years of nondischargeability to enforce their claims, the statutory period would run from the accrual of the creditor's claim, instead of running from the initiation of a proceeding that may, as in this case, predate that claim.

Potential Loophole

The creditor also argued that the failure to toll Sec. 727(a)(8) would create a "loophole" in the Bankruptcy Code that would allow a debtor to receive a Chapter 7 discharge and then file, dismiss, and refile Chapter 13 petitions to take advantage of the automatic stay until six years have passed. However, Sec. 105(a) empowers bankruptcy courts to issue any order, process, or judgment necessary to carry out the provisions of the Bankruptcy Code and remedy attempted abuse. Additionally, Sec. 362 allows creditors to request relief from the automatic stay "for cause." BAPCPA amended the Code to restrict application of the automatic stay in cases of bad faith serial filers, and Sec. 349(a) allows a court dismissing a bankruptcy petition for "cause" to order that the dismissal of the petition bars the later discharge of any debts that could have been discharged in the initial proceeding. Therefore, bankruptcy courts have several options for warding off the "loophole" scenario presented by the creditor.

Potential Claimant Entitled to Notice

A wrongful death claimant who had not yet filed suit, but whose identity as a potential claimant was either actually known or reasonably ascertainable to the debtors, was a "known creditor" and, therefore, should have been given specific notice of the debtors' bankruptcy proceeding and the pertinent filing dates. An automobile accident in a construction zone operated by the debtor resulted in two fatalities.

Debtor’s Knowledge of Potential Liability

The debtor became aware of the accident almost immediately, and short time later reported the incident to its liability insurer. The insurance company promptly assigned a claim number to the accident, hired accident reconstruction experts to investigate the incident, and retained legal counsel to represent it in the matter. Approximately one year after the accident, the debtor and its various subsidiaries filed for Chapter 11 relief. The estate of one of the victims of the car accident did not receive notice of the bankruptcy filing, the claims bar date, or the plan confirmation hearing.

Claimant a Known Creditor

The U.S. Court of Appeals for the Fourth Circuit held that the lower courts correctly determined that the decedent's estate was a known creditor at the time of the debtor's bankruptcy filing. While there is no bright-line rule applicable in determining whether a particular creditor is known or unknown to a debtor for constitutional notice purposes, a court should focus on the totality of the circumstances and evaluate whether a careful examination of its own books and records would alert a reasonable debtor to the possibility that a claim might reasonably be filed against it by a particular individual or entity. In the case at hand, the accident was extensive and tragic and, consequently, received significant coverage in local newspapers. The debtor not only saw these articles, but contributed to them. Additionally, the accident was reported by the debtor to its liability insurer as "an occurrence or an offense which may result in a claim."

In re J.A. Jones, Inc., 2007 U.S. App. LEXIS 15173 (4th Cir. 2007)

IRS Claim Not Satisfied by Property Not Actually Surrendered

Chapter 13 debtors’ proposal to surrender personal property that the IRS could not levy without resorting to litigation did not constitute a “surrender” within the meaning of Bankruptcy Code Sec. 1325(a)(5)(C).

The IRS filed a notice of tax lien with respect to the debtors' tax deficiencies for the tax years at issue and perfected its security interest in all of the debtors' property. The debtors proposed a plan that attempted to invoke both the "cram down" and "surrender" options of Sec. 1325(a)(5). The debtors decided to surrender their clothing, jewelry and various household goods and requested that the IRS reduce its secured claim. The IRS rejected the debtors' proposed amendment to its claim arguing that it would be without any means of forcing the debtors to turn over the collateral securing its claim because the Internal Revenue Code exempted it from administrative levy. However, the IRS could seek judicial enforcement of its lien rights and convert the property to payment of its claim.

In the absence of actual delivery or turnover of the property to the IRS, the debtors would retain the very property they "surrendered" because the IRS would face substantial legal obstacles to collecting the property. While the term "surrender" is not defined, at the most basic level, surrender means relinquishment of all rights in the property, including the possessory right, even if such relinquishment does not always require immediate physical delivery of the property to another. If a secured creditor is legally foreclosed from immediately obtaining the property that a debtor proposes to surrender and the debtor does not in fact voluntarily relinquish all rights in the property, including the right to possession, then the debtor can in no way be said to have "surrendered" any of his rights in the property.

In re White, 2007 U.S. App. LEXIS 9237 (4th Cir. 2007)

Serial Bankruptcy Filing Triggers Automatic Stay as to Codebtor

The codebtor stay of Section 1301 barred a creditor from proceeding with a post-petition foreclosure sale of a debtor's residence, even though the automatic stay of Section 362 did not arise as a result of the debtor's repeated bankruptcy filings. The debtor filed her bankruptcy case seeking relief under Chapter 13, intending to stop a foreclosure sale of her home scheduled for later that same day. The debtor alerted the creditor of the bankruptcy filing but the creditor indicated that it would not stop the foreclosure sale because the debtor had filed two previous bankruptcy cases within a one year period (both cases having been dismissed) and, consequently, there was no automatic stay by virtue of Section 362(c)(4)(A)(i).

The debtor filed a motion to set aside the foreclosure sale, arguing that the sale was conducted in violation of the codebtor stay of Section 1301. The creditor contended that the effect of the debtor's repeat filings was that it prevented both the automatic stay and the codebtor stay from going into effect. Otherwise, the creditor argued, the "vitality of the codebtor stay is at the mercy of the status of the automatic stay." Nonetheless, the court found the terms of Section 362(c)(4)(A) unambiguous in that only the automatic stay of Section 362(a) is prevented from going into effect "when the factual predicate enumerated in Section 362(c)(4) exists. Section 362(c)(4)(A)(i) does not address the applicability of the codebtor stay that arises under Section 1301(a), and it certainly does not provide that the codebtor stay of Section 1301 does not come into effect if the circumstances of Section 362(c)(4) are met."

Further, the court found that, "nowhere in Section 1301(a) is the codebtor stay limited, qualified, or effected by Section 362(c)(4)." While the court could annul the codebtor stay, there was no indication that the debtor's repeat filings constituted abuse of the bankruptcy system. The dismissals of the debtor's two prior cases were due to filing deficiencies, at least some of which were attributable to her lawyer.

In re King, 06-15660, (Bankr. D. Md. 2007)

Nondischargeable Judgment Does Not Include Fees and Costs

In Barsh v. State of Maryland Central Collection Unit, 2006 Bankr. LEXIS 3529 (Bankr. D. Md. 2006), the bankruptcy court granted a discharge, which the debtor claimed included a judgment for a fine imposed by the state. While the fine itself was nondischargeable, the court's discharge order included attorneys' fees and other costs associated with the fine.

Following entry of the bankruptcy court's discharge order, the state sought a garnishment against the debtor's wages to satisfy the judgment. The debtor challenged the garnishment in both state court and the bankruptcy court. The state court entered a judgment first, finding that neither the fines nor the fees and costs owed by the debtor to the state were dischargeable.

The bankruptcy court had exclusive jurisdiction to determine the dischargeability of all claims against the debtor, including the judgment for the fine imposed by the state. However, after the bankruptcy case was closed, the state court having jurisdiction over the state's claim had concurrent jurisdiction to determine whether or not that debt was dischargeable.

The debtor, faced with a post-discharge collection action by the state, should have sought to remove the state court action to the bankruptcy court. Instead, the debtor permitted the state court to determine the dischargeability of the state's claim against him. As such, the debtor's contention that the state's claim had been discharged in bankruptcy was preclusively determined against him by the state court.

5th Circuit

Creditor Had Standing Despite Abandoned Plan

A creditor had standing to file an adversary proceeding objecting to a Chapter 13 debtor’s discharge. Approximately one year prior to his bankruptcy filing, the debtor borrowed money from the creditor and secured the loan with collateral consisting of a motorcycle, two shotguns, a pistol, a television, a VCR, and a riding lawnmower. The debtor’s repayment plan provided for the surrender of the motorcycle to the creditor in full satisfaction of the loan. Several months later, the debtor's case was converted to Chapter 7. The creditor was listed as an unsecured creditor with a non-priority claim, However, the motorcycle was not listed as an asset. At the creditors' meeting, the debtor stated that he still owned the motorcycle, but that the shotguns belonged to his father and grandfather, and he no longer had the television or the riding lawnmower.

The creditor filed an adversary complaint alleging that, because the debtor did not own the shotguns given as collateral, the loan was obtained by fraud and false pretenses and, thus, the debt was not dischargeable under Bankruptcy Code Sec. 523. However, the bankruptcy court ruled that the creditor did not have standing to object to the debtor’s discharge because confirmation of the debtor's modified Chapter 13 plan, under which the debtor was to surrender the motorcycle to the creditor in full satisfaction of his debt, was binding as to both parties. Therefore, when the case was converted to Chapter 7, the creditor did not have a claim against the debtor, secured or unsecured.

On appeal, the Fifth Circuit Court of Appeals determined that it would be unfair to bind the creditor to a Chapter 13 plan where the debtor abandoned the plan by exercising his right to convert from Chapter 13 to Chapter 7. In addition, the debtor testified that he still had the motorcycle. Thus, the debtor failed to fulfill his obligation under his Chapter 13 plan to surrender the motorcycle to the creditor in full satisfaction of his debt.

In the Matter of Dorsey, 2007 U.S. App. LEXIS 24784 (5thCir 2007)

Plan Payments Satisfy Security Interest in Property Rents

A lender with a security interest in rents from a Chapter 13 debtor's property was entitled only to payments under the debtor's plan in the amount necessary to satisfy its allowed secured claim. The lender argued that it was entitled to the payment of its claim plus the rents from the property. However, the lenders claim was limited by the Code to the value of its collateral, and allowing the lender to recover both rents and plan payments would impermissibly give the lender more than the value of its collateral. In re Allen, 2006 Bankr. LEXIS 3629 (Bankr. S.D. Tex. 2006)

6th Circuit

Venue Transfer Mandatory

In a recent decision, the U.S. Court of Appeals for the Sixth Circuit held that a bankruptcy court may not retain a case filed in an improper venue over a timely objection by an interested party.

In consolidated cases, two sets of debtors, who were residents of the Northern Mississippi suburbs of Memphis, filed their bankruptcy cases in the Western District of Tennessee. The U.S. Trustee in the Northern District of Mississippi timely raised an objection and sought to dismiss or transfer the cases on the ground that venue was lacking because the debtors did not reside in the district, as required by 28 U.S.C. Sec. 1408.

The venue requirements of 28 U.S.C. Sec. 1408 are mandatory, not permissive. If a case is commenced in an improper venue, a court must dismiss the case or transfer it to a jurisdiction of proper venue if an interested party files a timely objection.

The appeals court also examined the interplay of Federal Bankruptcy Rule 1014(a)(2) and 28 U.S.C. Sec. 1408 and concluded that the former authorizes the transfer of an improperly venued case only to a district in which the case could have been brought originally. To the extent that there was any conflict between the Bankruptcy Rule and Sec. 1408, the statute trumped the rule.

Thompson; Jordan v. Greenwood, et. al., 2007 U.S. App. LEXIS 25975 (6thCir 2007)

Retirement Plan Loan Not a Debt

A retirement plan loan was not a “debt” under the Bankruptcy Code where the plan administrator did not have claim for repayment against either the debtor or his estate.

Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the majority of courts held that 401(k) loans were not “debts” under the Code, and because Congress did not explicitly say otherwise, the bankruptcy court in Eisen v. Thompson, 2007 U.S. Dist. LEXIS 47383 (BankrNDOhio 2007), presumed that "debt" retained its pre-BAPCPA meaning. Although Congress gave protection to 401(k) plans in bankruptcy by excluding contributions to retirement accounts from property of the estate under Sec. 541(b)(7) and exempting retirement accounts from property of the estate under Sec. 522(n), it did not add any amendments stating that 401(k) loans constituted “debts” or “secured debts.”

In the absence of any evidence that indicated that the circumstances under which the debtor borrowed money from his retirement account was “special,” a retirement plan loan or its repayment does not constitute a “special circumstance” under Bankruptcy Code Sec. 707(b)(2)(B)(i). Retirement plan loans are neither extraordinary nor rare and, without more, withdrawal of one's retirement funds could not be a special circumstance within the accepted definition of the term.

910 Creditors Entitled to Deficiency Claim

Two recent decisions from the Eastern District of Michigan hold that the hanging paragraph of Section 1325(a)(5) does not force a 910 creditor to accept surrender of its collateral in full satisfaction of the debt. In re Hoffman, 2006 Bankr. LEXIS 3754 (Bankr. E.D. Mich. 2006); In re Particka, 2006 Bankr. LEXIS 3160 (Bankr. E.D. Mich. 2006)

7th Circuit

Landlord’s Removal of Tenant’s Belongings Violated Stay

A landlord violated the automatic stay by removing a debtor-tenant's personal property from her apartment following her eviction. The landlord had notice of the debtor's bankruptcy and had an affirmative duty to deliver the debtor's personal property to the bankruptcy trustee. Bankruptcy Code Sec. 362(b)(22)’s exception to the automatic stay for evictions does not authorize a landlord to remove the personal property of an evicted tenant in bankruptcy. As a custodian of estate property of consequential value to the estate, the landlord had an affirmative duty to turn over the evicted tenant’s property to the trustee.

Ward v. Edwards, 2007 U.S. Dist. LEXIS 75915 (NDIll Oct. 10, 2007)

Chapter 13 Audit-Related Fee Request Granted

The attorney for Chapter 13 debtors was granted an award of additional attorneys' fees from the bankruptcy estate for his representation of the debtors during an audit performed by the U.S. Trustee's (UST) office. However, the court granted an amount that it determined was reasonable for the legal services rendered.

The court in In re Moreland, 2007 Bankr. LEXIS 2103 (Bankr. C.D. Ill. 2007), ruled that the attorney's audit-related services were not already compensated by the $2,500 "no look" fee. The better course of action would have been to file an application for fees in advance for the purpose of rendering audit related legal services, and setting forth the proposed compensation and source of payment. The court determined that the audit was not complex and that a reasonable value of the legal services rendered for the audit was $400. The court granted the UST's objection to an award of costs.

Trustee May Not Administer Exempt Assets for DSO Creditor

Bankruptcy Code Sec. 522 (c)(1) did not give a bankruptcy trustee a valid basis with which to object to a debtor's claimed property exemptions or to administer otherwise exempt property for the benefit of a domestic support obligation (DSO) creditor. Exempt property is not estate property, and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) does not allow the trustee to liquidate the exempt property for distribution to DSO creditors.

Otherwise exempt property does not lose its exempt status under Sec. 522(c)(1), and it is not property of the estate subject to administration by the Chapter 7 trustee. BAPCPA enhanced the rights of DSO creditors but conspicuously did not provide trustees with the additional duty or authority to liquidate exempt property for the benefit of a DSO creditor. Moreover, Sec. 507(a)(1), which raised domestic support obligations to first priority, simply provided the priorities for distribution of estate property. It does not grant authority of the trustee to liquidate exempt property. BAPCPA only amended Sec. 704, which outlines the duties of the trustee, to require a trustee to provide written notice to holders of DSO claims and to state child support enforcement agencies of their rights in collecting child support during and after the case.

In re Vandeventer, Jr., 2007 Bankr. LEXIS 1291 (Bankr. C.D. Ill. 2007)

Automatic Stay in Serial Case Terminates in its Entirety

A bankruptcy court for the Northern District of Illinois has joined the minority of courts limiting the duration of the automatic stay in its entirety to 30 days for a case filed within one year of the date on which a previous case was dismissed. When a bankruptcy case is filed, all property of the debtor becomes property of the estate unless it is abandoned, exempt, or excluded by definition. Interpreting Section 362(c)(3)(A) as terminating the stay only as to actions taken against the debtor or the debtor's property would render the provision inconsequential and lead to an absurd result in conflict with related statutory provisions, such as that providing for notice to all parties in interest of a motion to extend the stay. In re Curry, 2007 Bankr. LEXIS 474 (Bankr. N.D. Ill. 2007)

Treatment of Secured Claim Unaffected by Future Intent

A debtor may deduct from the "means" test scheduled mortgage payments that are contractually due on the petition date even if the debtor intends to surrender the property. In the means test, Congress intended to create a mechanical test for establishing a presumption of abuse. Bankruptcy Code Section 707(b)(2) instructs debtors to deduct the amounts scheduled as contractually due in each of the 60 months following the date of the petition, without regard to whether the debtor intends to keep the collateral. In re Randle, 2006 Bankr. LEXIS 3519 (Bankr. N.D.Ill. 2006)

Similar reasoning was embraced by the bankruptcy court for the Eastern District of Wisconsin, where the court held that the debtors could take a means test deduction for mortgage payments, even though they did not intend to reaffirm their mortgage debt. According to the court, the means test is intended to give a snapshot of the debtor's finances as of the petition date. Thus, any payments that the debtor is contractually obligated to make should be included in the means test. The court left open the possibility, however, that the debtor's Chapter 7 case could be dismissed as an abusive filing under Section 707(b)(3) based on the totality of the debtor's financial circumstances. In re Nockerts, 2006 Bankr. LEXIS 3435 (Bankr. E.D.Wis. 2006)

8th Circuit

Opt-Out Statute Provides No New State Exemptions

A bankruptcy court properly ordered tax refunds of Chapter 7 debtors to be turned over to the bankruptcy trustee. The Missouri opt-out statute did not permit the Chapter 7 debtors to exempt tax refunds from their bankruptcy estates. The opt-out statute was not an exemption statute and, thus, there was no exemption for tax refunds under state law or applicable federal law.

In consolidated bankruptcy cases, Chapter 7 debtors asserted that their state and federal income tax refunds were exempt from their bankruptcy estates based on the Missouri opt-out statute. The debtors interpreted the language of the statute to mean that any property that was not subject to attachment and execution under Missouri law was exempt from the estate. However, the opt-out statute announced no new exemptions under Missouri law. The statute simply provided that, where another Missouri statute specified that certain property was exempt from attachment and execution, then a debtor could exempt that property from the bankruptcy estate. Thus, the debtors' anticipated tax refunds, to the extent they were attributable to events occurring prior to the filing of the bankruptcy petition, were part of the bankruptcy estate.

In re Benn, 2007 U.S. App. LEXIS 16248 (8th Cir. 2007)

Applicable Commitment Period Is Temporal

A below-median Chapter 13 debtor was denied confirmation of her Chapter 13 plan because her plan would pay off her debts prior to the completion of the three-year applicable commitment period. The term "applicable commitment period" refers to the required duration of a Chapter 13 plan rather than the minimum amount a debtor must pay to unsecured creditors in order to get a discharge. Because the trustee objected to the plan, the debtor was not entitled to an early payoff, even though her creditors would receive the same return on their claims whether the duration of the plan was 36 months, or a lesser period.

In re Luton, 2007 Bankr. LEXIS 717 (Bankr. W.D. Ark. 2007)

Reasonable and Necessary Expenses Determined by Means Test

Projected disposable income for above-median Chapter 13 debtors is determined by the means test, according to a recent ruling by the bankruptcy court for the District of Nebraska in In the matter of Mitchell, 2007 Bankr. LEXIS 2 (Bankr. D. Neb. 2007). An unsecured creditor objected to confirmation of the debtor's plan because the debtor did not commit all of her projected disposable income to plan payments. Using figures from the Form B22C, the debtor had disposable monthly income of only $447 per month. However, Schedules I and J revealed that the debtor actually had monthly disposable income of nearly $3,000. Nonetheless, as an individual with above-median income, the debtor's disposable monthly income was determined by application of the means test rather than Schedule J.